The federal government, the nation's largest consumer and investor, is cutting back at a pace only exceeded in the last half-century by the military demobilizations after the Vietnam War and the Cold War. And that's before the sequester cuts even factor in.
While total government spending continues to increase — think broad federal benefit programs like Social Security — the mandatory federal spending cuts known as sequestration will dampen that increase. These cuts join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government's contribution to the nation's gross domestic product by almost 7 percent in the last two years.
How spending works
Government purchases and investments expand the nation's economy, just as private-sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity.
The shrinking government is a normal response to an extraordinary situation. Government spending generally rises during recessions and falls in recoveries. Spending always declines at the end of one war let alone two). Three years after a recession, the economy typically is restored to full health.
This time is somewhat different. Growth has remained sluggish and millions remain unemployed.
Not the most
Still, the current round of austerity does not approach the depth or duration of an earlier cutback. Between 1969 and 1974, as spending on the Vietnam War declined, the government reduced consumption and investment by an inflation-adjusted 24 percent, compared with 6.9 percent over the last two years.